In order to market time with success, you have to sell at the right time and buy at the right time. Take yesterday as an example. At 9:30:01 the TSX was down 385. It closed down 72. When would one sell? When would one buy? I have heard of people who sold out in 2008 before the crash, but I know of none who bought back in under around 12000. In other words, for all the down they missed, they missed as much up. For our clients who stuck it out, they are now at higher levels than they were before the crash, albeit with a huge psychological cost in the intervening period.
We believe that good assets will always have their value recognized by the market in due course, but that the market will misprice them from time to time. Since the mispricing is by its nature irrational, there is no good way to tell when to sell or buy as a trading strategy. As Keynes said, the market can stay irrational longer than you can stay solvent – and he should know, he went bust at least once, and maybe twice. We use the mispricing to build long term positions.
Take for example Bank of Nova Scotia. It was $49.05 on Aug. 31/08, trading at about 13 times earnings with a dividend yield of just under 4%. Six months later it was trading at $25.27, had a p/e ratio of 7 or 8 and a dividend yield of 8%. The market thought all the banks in the world were going broke. It would have been brilliant to sell in Aug. 08, buy back in March 09, and still hold it now at the present $58.24. You will search long and hard to find someone who did that. We held it through the crash, collected our $2 dividend each year, and we are now up 20% plus the dividend over the two and a half years for a gain of $14 in all, or 29%, or about 12% per year through the worst crash in 80 years.
Anyway, that is our method of operation. We are investors, not traders.
The author and clients of Baskin Financial own shares in Bank of Nova Scotia
